Corporate Ownership, Goals, and Governance - Research Paper Example

?Insert Insert Grade Insert Insert Corporate Ownership, Goals, and Governance Introduction This paper is a summary of four journal articles dealing with the topic corporate ownership, goals and governance. The first journal is by Connelly Brian et al titled “Ownership as a form as Corporate governance”. The second journal is by Sundaram Anant and Inkpen Andrew titled “Corporate goal revisited”. The third journal is by Fombrun Charles titled “Corporate Governance”. The last Journal is by Blair Margret titled “Corporate Ownership” Corporate “Ownership” by Blair Margaret The aim of the article is to demonstrate corporate ownership and dispute the assumption that companies are owned by shareholders. Blair looks at the rights of owners and concludes that shareholders do not have sufficient rights to be called the corporate owners. The article details the rights that owners have such as the right to acquire and dispose off assets and a right to get profits generated by the asset and its sale. The article claims that shareholders do not possess all these rights instead it is distributed to various stakeholders. The article argues that since these rights are not possessed by shareholders, it cannot be said that they are the owners of companies. The author also says that calling shareholders the owners of companies cannot guarantee them the rights of owners. However, the author in conclusion advocates for not distributing these rights because they may discourage investment. The distribution of rights between the shareholders and managers is also discussed. The shareholders, given that they contribute capital, have a right to elect the directors. Directors are the ones who make investment decisions on behalf of the shareholders. The shareholders do not possess the ultimate right to control the decision making of managers. The author says that this is because in large corporations the shareholders may be so many that even the managers may not know some of them. Shareholders also have limited liability and so cannot be responsible for the debts of firms. This author says this denies them the ultimate right to say that they are the owners of the firms. To support his argument, the author looks at how corporations create wealth. She says that wealth creation in a firm is not just because of the share capital of shareholders, but other stakeholders such as customers, employees and suppliers also make special investment contributions that are important to the company. The authors say that all stakeholders in the firm are investors. She gives an example of employees who dedicate their time and human resource to serve the firm. Even though they are compensated, they need to be recognized in the ownership of the firm. In conclusion the article discourages the view of looking at ownership of firms in terms of assets invested. It argues that the employees also create wealth for firms and their contribution must be respected. The article puts up a strong defense for inclusion of other parties, especially the employees in the ownership of firms. This view is good, but it fails to state what level of ownership can these stakeholders posses. Inclusion of employees as owners of firms just by virtue that they help in wealth creation would present a complex scenario in the ownership and management of firms. The only recommendation would be that the employees should be encouraged to buy shares in the firm so that they can be part of owners. “Corporate Ownership and Governance” by Connelly Brian et al The aim of this article is to demonstrate that corporate governance is not a reserve of the board of directors but also owners participate in the governance of firms. They do this by looking at the different forms of corporate ownership and how they influence decision making in the firm. They divide this in two categories, outside ownership and inside ownership. Inside Ownership This is when stock is held by the insiders. These insiders tend to make decisions that favor the interests of majority of shareholders. The executives gain more ownership of the company. They ensure the day to day running of the firm for the benefit of all shareholders. Board members normally represent the interests of shareholders. When a firm is aligned towards inside ownership, these board members normally also must hold stock in the company. Another category of people who own stock are non-executive employees. These are the employees that are working in the firm. They are required to own at least one share. This is necessary to create a bond between the employee and the firm. This leads employees to be more committed to their duties. Outside Ownership The authors define outside ownership as when stock is hold by outsiders who monitor the actions of managers. They then discuss the forms of outside ownership as below. Block-holder is any investor with more than 5 percent equity in the firm. Block holders by virtue of their greater equity, may have more powers in decision making and may enjoy privileges not given to small shareholders. When a block-holder is disappointed with the firm, the firm may be forced to repurchase his shares above the market value to avoid take over. The block- holders because of their equity are better placed to monitor the activities of the firm even though some firms normally appoint them as executives in the management. A family may also own a corporation. In this case a family is a block-holder. However, such types of ownership, the authors claim, do not benefit much either the block-holders or the minority shareholders. Firms may also purchase shares in other firms. Since the firms normally have capital more than individuals, they normally purchase large shares and become block holders. This is a blessing to firms in need of capital because it can be raised within a short duration. However, this may be a strategy by the buying firm for a takeover. The purchasing firm also may have a right in decision making and especially in allocation of resources. Another form of block-holding is state ownership. This type of ownership is common in young economies and in countries where there are poorer property protection rights. However, this ownership is also witnessed in developed economies like USA and UK. State ownership is common in markets that are liable to monopoly, in firms dealing with public goods or in firms too important to fail. There are problems with this kind of ownership such as lack of innovation, budget constraints, increased corruption, and poor financial performance. This has led to most countries privatizing state owned firms. Another form of corporate ownership, discussed by Connelly et al, is agent ownership. This is when shareholders have dual relationship; they serve as managerial agents and investing towards the objective of ultimate shareholders. Another form of business ownership, discussed by the authors, is private equity. This occurs when the shares of a company are not publicly traded. From the formation, the ownership of such firms is on the founders and their close associates. One form of private equity is venture capital. This is equity from professional investors whose reward is capital gain. Many young firms depend on venture capital as a source of capital and therefore venture capitals have a greater say in the management of the firms. Many venture capitalists are also agent owners who represent the interests of a principal group through ensuring that the gains are distributed equally and also play the monitoring role. This article clearly elaborates the categories of ownership in the firms. They say ownership influences governance. However, it is a fact that most of the owners of firms are share holders in firm who elect a board of directors to represent their interests. This board participates in the governance of firms on behalf of the shareholders. “The Corporate Objective Revisited” by Sundaram, Anant and Inkpen Andrew This journal looks at what should be the objective or goal of the corporative. This aim is achieved by looking at two major arguments. The stakeholder argument and the shareholder value maximization argument. Stakeholder Argument In this argument, the authors say it should be the goal of all firms to attend to the interests of all stakeholders and not just shareholders. The interest of key stakeholders must the included in the very purpose of the firm and stakeholder’s relationship must be maintained. The socioeconomic purpose of a corporation is to create and distribute wealth to all stakeholders without favoring any group at the expense of the other. Stakeholder here is defined as any individual or group that is affected by the achievement of the goals of the organization. The stakeholder argument goes against the insistence on shareholders. It encourages firms to treat all important stakeholders with equal importance. However, the authors say that different scholars have failed to agree on who are the important stakeholders in the firm. It is also very hard for managers to establish who are the important stakeholders and treat them with equal importance; therefore, they conclude that this goal might not be achievable in many firms. Shareholder Value Maximization The authors put forward five arguments to support the goal of shareholder value maximization. First, maximizing shareholder value supports the stakeholder argument. Secondly, shareholder value maximization provides a way for managers to do away with entrepreneurial risks. Thirdly, having more than one goal will make governing hard. Fourthly, it is easier to make shareholders out of stakeholders than the reverse. Lastly, stakeholders have avenues to seek remedy in case of breach of contract than shareholders. These arguments as discussed by the authors are summarized below. Shareholder value Maximization maximizes the value of the whole firm According to this article, shareholders have only a claim on the residual value of their shares. They are the ones who provide the capital to the firm. This capital does business and they only have a claim after all the expenses have been deducted. Shareholders are the ones who provide incentives to the business. Maximizing the value of their shares also maximizes the value of the whole organization. Shareholder Value Maximization distorts entrepreneurial risks Managers of the firms may fear to invest into risky ventures because they might bear the costs in case of loses. They might be so cautious when making investment decisions and in the end miss on very lucrative business ventures. This denies the firm the opportunity to invest in opportunities for growth, new products, and markets, new technology, and in risky areas of economic activity, all of which deny the firm the ability to innovate and have a competition edge in the market. Fixed claimants would not want to lose their money. However, the shareholders bear the systematic risks allowing managers to undertake risky business ventures; this is because they are residual claimants. It is these risky ventures that have high capital returns. The authors argue that if managers are focused towards maximizing the share capital of the shareholders then the whole firm will enjoy the benefits. Having more than one Objective causes confusion Here the authors say that focusing on several stakeholders might cause confusion and affect decision making. Sundaram and Inkpen conclude that basing the firm management goal on the shareholder value maximization is a single parameter that is measurable and observable. Stakeholders can become Shareholders but the reverse is difficult Sundaram and Inkpen say that stakeholders such as employees, customers, suppliers, bond holders and local community can also own stock in the firm and therefore become shareholders. On the other hand, Sundaram and Inkpen say that it is very hard for shareholders to become stakeholders. For example, it is impossible for a shareholder to demand to become a community member, a supplier, or a customer of the firm in which he owns shares. That being the case, if stakeholders are given the role of governance, then the shareholders will be denied the chance of governing the firms which they have shares in. Stakeholders can seek Legal redress In this case, the authors argue that other stakeholders are protected by the contract agreement with the firms. They can use this contract to file legal proceedings against the firm. Shareholders do not have such rights and hence the fiduciary duties of firm boards should be bestowed on the shareholders because they are the ones who have the clear rights to contract with the firm. This article clearly advocates for the goal of shareholder value maximization and gives points to support the argument. However, it is recommended that the value of other stakeholders should also be respected. “Corporate Governance” by Fombrun Charles The aim of this article is to demonstrate corporate governance. The authors use various literatures to achieve this. He starts by defining corporate governance as a set of procedures, systems and cultures put in place to ensure that the firm is run according to the long term interests of shareholders. This requires sustained relationship between the firm and its principal stakeholders. Fombrun, (267) says that the main corporate governance mechanism is the board of directors. The board of directors is put in place to ensure that the managers do not put their interests before that of stakeholders and shareholders. Good Governance Fombrun observes that corporate governance best practices involve improving practices and disclosure in five main areas which include board structure, audit and financial controls, executive compensation, shareholder rights and market control. These areas as discussed by Fombrun are summarized below. Board Structure Board of directors represents the interests of shareholders. The body is set in order to employ, fire, remunerate, and monitor the activities of the management. All these are aimed at maximizing the value of shareholders. In order for board governance to be effective, a certain structure has to be followed. The body should be composed of majority of non-executive members. The chairman should be preferably a non-executive chairman rather than a chairman CEO. Since this body monitors the activities of managers, it should hold non-executive meetings without the management being present. All board committees should be chaired by a non-executive chairperson. There should be a single and united board that represents the interests of shareholders rather than a divided one. With such a structure, the board will efficiently be able to oversee the activities of managers and ensure that the interests of shareholders are protected. This ensures good governance in the firm, Fombrun concludes. Audits and Financial controls This is put in place to ensure that the shareholders’ investment in the firm is not embezzled. There should be an accurate procedure that ensures financial disclosure on time and the intangible assets should also be included. For the audit to be accurate and fair, it should be done by external independent auditors that do not have any conflict of interest in the firm. An audit committee should also be established in the board. This committee should comprise of independent directors with sufficient resources required to carry out oversight duties. The internal control mechanism and ethical guidelines should also be strengthened. All these mechanisms are geared towards ensuring accountability and transparency when using the shareholders funds. Executive Compensation Executive members carry out various duties on behalf of the firm. In order to motivate them, they have to be adequately compensated, Fombrun asserts. The compensation should match the output of the executive members. Under-compensation will discourage them from discharging their duties or might lead them to corrupt deals. On the other hand, over compensation might lead to a loss on the firm. Mechanisms should also be put in place to ensure that money paid to executive under false claim of output can be recovered. Shareholder rights Shareholders are important in the running of the firm hence their rights must be protected. This is because they are residual claimants. The shareholders are treated according to the shares they hold. Shareholders should have one vote per share. Multiple classes of stock with different rights should be eliminated. This makes governance easier. Shareholders should also be given the powers to nominate directors. Market control The firm should not put up several anti-takeover mechanisms such as preference shares, golden shares, poison pills, and classified boards. These mechanisms may deny the firm the opportunity to raise the necessary capital, Fombrun argues. Governance Ratings Fombrun says that there are private companies that have been set up to rate the governance of companies. This aids insurers, regulators, and investors to monitor their risk exposure. Investors normally are more willing to put their money in well governed firms. They are more willing to pay higher premiums on well governed shares hence firms should strive to instill good governance in their systems. This article clearly stipulates how governance should be carried out in the firm and also details the stakeholders involved in the governance. The article is exhaustive. Works Cited Blair, Margaret. “Corporate Ownership.” The Brookings Review, Vol. 13, No. 1 (Winter, 1995), pp. 16-19.Print Connelly, Brian et al. “Ownership as a form of Corporate Governance.” Journal of Management Studies Vol. 47 Issue 8, (December 2010), pp. 1560-1589. Print. Fombrun, Charles. “Corporate Governance.” Corporate Reputation Review, Vol. 8, No. 4, (2006), pp. 267–271. Print. Sundaram, Anant and Inkpen, Andrew. “The Corporate Objective Revisted.” Organization Science Journal, Vol. 15, No. 3 (May - Jun., 2004), pp. 350-363. Print. Read More